New report warns of policy-induced slowdown

By Steve UMIDHA

Weakening economic output and rising interest rates will trigger more difficult conditions for financial institutions such as banks, insurers and fund managers, and it could be worse than witnessed in the past two years, a new report reveals.

Study by the Economist Intelligence Unit – a research and analysis division of the Economist Group, further notes that heavily indebted developing countries like Kenya will find it harder to refinance foreign debt, driving some to possible loan default.

However, the report, titled Finance Outlook 2023 – a new test for financial stability, is of the opinion that global lenders like the International Monetary Fund (IMF) “will continue its lenient treatment of economies requiring its financing programme.”

Rising rates generally have positive impacts for financial firms, as they lead to wider interest-rate spreads for banks and better investment returns on the portfolios of insurance companies and fund managers.

The Central bank’s Monetary Policy Committee (MPC) decided to keep the Central Bank Rate unchanged at 9.50 percent in May following a rate hike in March.

However, they also slow the overall economy and reduce the cash available to households and firms, while trimming demand for now-more-expensive credit.

“According to our forecasts, financial firms in the west have enjoyed some widening in interest margins recently, but these will soon narrow again as demand wanes for credit for consumption and investment,” the report reads in part.

Ordinarily, when interest rates are high, both businesses and consumers tend to cut back on spending.

This naturally causes earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses increase their spending, causing stock prices to rise.

Indeed, available figures show that Kenya’s current administration has continued with its borrowing spree in an effort to meet its internal financial obligations as well as bridge the mounting total public debt which stood at Sh9.1 trillion as of December 2022, translating to a debt to GDP ratio of 63 percent and 13 percent points above the IMF’s recommended threshold of 50 percent for developing countries.

Treasury statistics for instance show that President William Ruto’s regime borrowed Sh162 Billion in May this year for instance to support the country’s economic recovery, in addition to Sh52 Billion lent from the World Bank in April this year.

The country’s financial chiefs administered a loan of Sh408 Billion – an economic support loan from African Export–Import Bank, also referred to as Afreximbank in May this year.

“The amount will go to various sectors of the economy to enable the government of Kenya to manage the economic headwinds induced by global factors,” said a source from the National treasury familiar with the transaction announced in Nairobi.

Similar concerns were also expressed by the projections by Fitch Solutions – a credit market data firm which found last month that Kenyans were still spending, but at a slower pace than a few months ago, a sign that the biggest part of the economy is beginning to moderate.

“We forecast a slowdown in consumer spending growth in Kenya in 2023, although it will remain in positive territory,” reads in part the Kenya 2023 Consumer Outlook: Robust Growth Ahead, Easing Inflation, a Further Boost, report by the company.

A possible deterioration in consumer spending – which is the total money spent on final goods and services by individuals and households for personal use and enjoyment in an economy, the research says, will only happen should the currency devaluation persist.

Many markets, inflationary pressures remain elevated, and while the rate of price changes is slowing, it remains higher than central banks’ targets and what consumers have grown accustomed to, especially over the past decade.

The impact, the research notes, will not be spread evenly across the different consumer spending segments, with the prices of some components, such as rent, services and some food items like meat and poultry, remaining stickier and more elevated for the larger period of the year.